China Sky Legal Resolution: Is a fine of $10m fine and 10% shareholding a commensurate sentence?

China Sky Legal Resolution: Is a fine of $10m fine and 10% shareholding a commensurate sentence?

Posted by Eugene SAY Gui Hua, Year 4 undergrad at the School of Business, Singapore Management University

In a first negotiated deal of it’s kind, former CEO of China SKy, Mr. Huang Zhong Xuan was ordered to pay a civil penalty of S$2.5million and surrender 10% of his shareholdings in China Sky. The lead up to this verdict involved Mr. Huang attempting to transfer US$10m out of his private banking account at the brink of the lawsuit and subsequently refusing to appear in Court. China Sky and its directors have been investigated by the Commercial Affairs Department since February 2012 following a number of irregularities uncovered by Singapore Exchange in the course of reviewing the annual reports filed by China Sky for financial years 2006 to 2010. These disclosures pertain to interested party transactions between China Sky and its then-audit committee chairman Lai Seng Kwoon and an aborted land acquisition in Fujian province. Shortly after that, Mr Huang abruptly resigned as China Sky’s CEO and instructed Credit Suisse to start selling large quantities of Trony Solar shares.

As China Sky is incorporated in the Cayman islands, significant difficulty was faced in effecting a requisite punishment under MAS’ Securities and Futures Act. In following consultation with MAS and the Attorney-General’s Chambers, the CAD agreed to discontinue the criminal probe so that a civil-penalty settlement could take place. The civil-penalty regime came into force in 2004 to complement criminal sanctions and provide a nuanced approach to fighting market misconduct. Under Section 232 of the SFA, MAS may enter into agreements with any person for the person to pay a civil penalty for breaching certain SFA provisions – with or without admission of liability.

While this legal resolution serves as a good precedent to protect shareholders from misdeeds of SGX-listed companies incorporated overseas (and S-Chips in particular), the severity and quantum of the Civil Penalty settlement pales in comparison to the damage these companies can potentially bring to public shareholders. Such a ‘backup’ legal enforcement still provides a loophole for fraudulent companies to exploit as the punishment does not seem large enough to deter wrongdoing.

Article:

Ex-CEO of China Sky to pay civil penalty, give up 10% of his shares

Lynette Khoo, 13 February 2015, Business Times Singapore

FORMER chief executive of beleaguered China Sky Chemical Fibre, Huang Zhong Xuan, will pay a civil penalty of S$2.5 million and surrender 10 per cent of his shareholding in China Sky under a settlement agreement with the Monetary Authority of Singapore (MAS).

The civil penalty was meted out after he admitted to making misleading public disclosures and failing to make the required disclosures to the market, thereby breaching the Securities and Futures Act (SFA), the MAS said on Thursday.

The S$2.5 million penalty will be paid from the US$3.7 million in his Singapore bank account, which was frozen under a High Court injunction that MAS obtained in 2013. The surrender or cancellation of his shares will raise the net asset value per share for existing China Sky shareholders.

MAS assistant managing director for capital markets Lee Boon Ngiap said: “The offer by Huang to surrender 10 per cent of his shareholdings in China Sky is the first negotiated settlement of its kind, directly benefiting existing shareholders of China Sky. We will continue to work closely with other statutory agencies to enforce the law against those who commit offences in our securities markets, whether they are based in Singapore or overseas.”

The MAS said the offer is expected to be approved by China Sky’s board of directors.

Mr Huang has also undertaken not to assume the role of a company director or be involved in the management of any Singapore-listed entity for three years.

Separately, the Singapore Exchange (SGX) said it is reviewing the roles of the other directors on China Sky’s board and those of its key executive officers who were holding appointments at the time relevant to the breaches of the listing rules noted by the special auditor of China Sky.

“SGX will take further action that it deems necessary,” it said on Thursday. The Exchange will allow trading in China Sky shares to resume once the company complies with conditions imposed by SGX.

China Sky’s “misleading disclosures” from 2006 to 2011 that breached Section 199(c) of the SFA were related to its announced purchase of a piece of land in Fujian, China, and its subsequent abortion of the deal.

The disclosures incorrectly depicted the transaction counterparty as an independent third party, when it was a related company, and provided a false reason for the delay in the transfer of the land-use rights to China Sky’s subsidiary, MAS said.

Mr Huang has also admitted to contravening Section 203 of the SFA through China Sky’s failure to make prompt and proper disclosure to the market concerning the Fujian land acquisition, which could have had a material effect on the price or value of its securities.

The Commercial Affairs Department (CAD) opened an investigation in February 2012; later on, in consultation with MAS and the Attorney-General’s Chambers, it agreed to discontinue the criminal probe so that a civil-penalty settlement could take place.

The civil-penalty regime came into force in 2004 to complement criminal sanctions and provide a nuanced approach to fighting market misconduct. Under Section 232 of the SFA, MAS may enter into agreements with any person for the person to pay a civil penalty for breaching certain SFA provisions – with or without admission of liability.

CAD director Tan Boon Gin said: “Cases like this have jurisdictional issues that make case resolution challenging. This case has come to a successful resolution through close collaboration between MAS, CAD and SGX, as well as assistance rendered by the authorities and regulators in the People’s Republic of China.

“The settlement is a fair and equitable one which is commensurate with the severity of the breaches. It not only ensures that Huang is punished for his misconduct, but his offer to surrender his shares is a remedial measure that will benefit existing China Sky shareholders.”

Mr Huang had in Oct 8, 2012 agreed to dispose of his entire 49.9 per cent stake in Rock Mart Equities, which owns 307.52 million shares or a 37.75 per cent direct stake in China Sky, to strategic investor Zheng Kai Su. Mr Zheng, a general manager of a plant belonging to a China Sky subsidiary, became the legal representative of that subsidiary in September 2013.

On Thursday, China Sky said a supplemental agreement between the two men was inked on Tuesday to extend the deadline for completion and to make reference to Mr Huang’s offer to surrender 15.34 million China Sky shares under the civil penalty settlement with MAS.

Mr Zheng will be deemed to hold 292.18 million China Sky shares upon completion of the share agreement. This share sale is conditional on the confirmation by the Securities Industry Council that it will not trigger a mandatory offer, the Fujian-based company said.

Guest Speaker Mr. Hemant Amin, Founder, Chairman and CEO of Asiamin Capital, a single family office, and Founder and Chairman of the BRKets investor groupMarch 17th, 2015

Hemant, a big thank you for educating and inspiring the next generation of leaders. You are a rare positive role model in the Asian capital markets and you showed the students that it is possible to create value because one has the right values and mindset like Buffett and Munger! :)